Business software is king of the hill in an otherwise mixed category

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Software presents a mixed bag of opportunity when it comes to profitability metrics.

In the three segments evaluated for the 2007 CRN Profitability Study, top-line sales growth was above 10 percent: Business software led the pack with 15.1 percent, followed by database management at 11.9 percent and e-mail/collaboration at 10.4 percent.

At the same time, the average gross margin for business software rose to 25.5 percent, the highest gross margin reported for this study. Database management offered the second highest gross margins of the study at 20.2 percent, off from a revised 22.3 percent in 2006. Average gross margin was 17.1 percent for e-mail/collaboration software.

Other notable metrics: The database management segment offers the biggest average deal size of all the categories in the study, as it did last year. But it also presents VARs with the longest time to recoup their investments in training.

To stay focused on profitability, Cumberland, Maine-based Northern Collaborative Technologies finds itself doing what software VARs across the board must do—lean on services. "In the collaborative solutions space, the big money is in services," said Andrew Pollack, Northern Collaborative's owner and president. The profit comes from expanding on the basics, he said, adding, "I say to customers, 'OK, you've got Notes, now what do you want to do with it?' "
To expand its services, Northern Collaborative has added security. "I do a lot more security review work than I did before," Pollack said. "People want to know that their e-mail and application data is really secure, and if it isn't, they want to know what I can do to get them there."

Next: The bottom line on software profitability

As far as strategic importance, e-mail and collaborative applications couldn't score higher among Northern Collaborative's customers, Pollack said. "I haven't gone into a major company in the last few years that has not considered e-mail to be a mission-critical application," he said. "If e-mail's down, somebody's fired."

Here, Pollack's experience differs from the survey data. The only software segment for which survey respondents reported a jump in strategic importance among customers was business software. For the 2007 survey, 71 percent of solution providers reported the category was of at least moderate importance, up from 63 percent in 2006. The strategic importance for both e-mail/collaboration software and database management slipped.

Pollack suggested his experience may differ from the pack because he focuses on Lotus products rather than on those from Microsoft. "The nice thing about being a reseller in the Domino world is that it's a smaller universe," he said.

A bright spot is sales cycles, which have gone down across the board—each segment shaved a month off its sales cycle in 2007 from 2006. Even so, two categories, database management and business software, shared the mantle for longest median sales cycle along with storage management, at four months.

Deal sizes also rose significantly in database management and business software but dropped in e-mail/collaboration.

Services-to-product ratios slipped in all three segments, from $4:$1 in database management to $2:$1; from $3:$1 in e-mail/collaboration software to $2:$1; and from $4:$1 to $3:$1 in business software.

Sabre Systems, Boca Raton, Fla., doesn't worry about services-to-product ratios because it has addressed profitability by staying focused almost entirely on services. A 17-year-old, privately held, exclusively Oracle solution provider, Sabre is now heavily involved in moving companies from mainframe to rack environments, said Louis Cupo, Sabre CEO.

Sabre focuses on small and midsize businesses but has served clients as large as Office Depot. Its expertise is teasing out more power and performance from customers' systems, he said, while whittling away at mainframe maintenance costs. "We really make our money in performance tuning."

Database Mgt. E-mail/
Business Storage
Sales Cycle ^ 4 months 3 months 4 months
Services-To-Product Sales
Ratio ^
$2:$1 $2:$1 $3:$1
Deal Size $66.900 $18,100 $56,400
Strategic Importance To Customer* 57% 71% 71%
Time To Recoup Training Investment 6.3 months 4.2 months 5 months
Source: 2007 CRN Profitability Surveys
Base: 322 solution providers
*Percentage of solution providers reporting more than moderate level of importance to their customers' businesses (scores of 5-7 on a scale of 1-7)
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